What happened?
In a landmark decision, the Employment Appeal Tribunal (EAT) has decided that payments in respect of “non-guaranteed overtime”, which is overtime that an employer is not required to offer, but an employee is required to work if offered, is part of “normal remuneration” for the purposes of the Working Time Directive and must therefore be taken into account when calculating holiday pay. The same applies to allowances paid to employees which are directly linked to work performed.
Since this decision relates to the meaning of the Working Time Directive, it only applies to the minimum four weeks’ statutory annual leave granted by the Directive. The additional 1.6 weeks’ leave provided to workers by domestic UK legislation is not covered by this decision, meaning that only “guaranteed overtime” - which the employer is liable to pay, even if the employee does not work it - is required to be included for calculating the payment due in respect of this element of annual leave.
When deciding what counts as normal remuneration for the purposes of the Directive the court decided, based upon previous decisions of the European Court of Justice, that payment has to be made for a sufficient period of time to count as normal. Due to this, a one off payment in respect of a period of overtime is unlikely to qualify as normal pay. If, however, the pattern of work is settled there should be no difficulty in identifying normal pay for the purposes of calculating holiday pay.
The good news for employees was tempered however, due to the fact that the EAT significantly restricted the scope for workers to bring retrospective claims for underpaid holidays. It ruled that a claim will be out of time unless brought within three months of the date of the last underpayment or if there has been a break of more than three months between underpayments.
What does this mean?
The decision will certainly increase wage costs for employers, but the quantum of this increase is unclear. Given the public importance of the case the EAT granted the right to appeal to the Court of Appeal in respect of the limitation point. Due to this the full financial implications of the decision will remain uncertain until the resolution of any appeal process.
What should we do?
Employers should determine which employees are affected by this decision and whether those employees are receiving all elements of holiday pay to which they are now entitled. If not, then this should be remedied for future payments. Employers should also establish whether the three month limitation period for bringing a claim has passed. If an employee is still within this time frame then an employer may wish to pay the employee any monies owed in order to prevent a claim or break a chain of underpayments. Assuming the appeal proceeds, there is obviously a risk that the Court of Appeal will overturn the EAT’s decision in respect of how far back employees can claim, so one way for employers to insure against that risk is by paying employees the correct amount now in order to break the chain.
The most common type of overtime is voluntary - the employer does not have to offer it, and the employee does not have to work it. The EAT did not reach any definitive decision on whether payments for this type of overtime need to be included in the calculation of holiday pay. However, it is likely that any such overtime would have to be taken into account if it is paid with such regularity that it constitutes “normal remuneration”.
Employers are also likely to have to deal with the added administrative challenges posed by having to apply different methods of calculation to holiday pay, depending on whether the holiday taken constitutes part of the four weeks granted by the Directive or the additional 1.6 weeks granted by domestic law.
The Government has set up a new task force to assess the impact of the ruling and the financial liability employers could face. This may be particularly important if the three month limitation on claims is appealed and employers should watch for any further developments.
